August 12, 2017

A weekend topic on public perceptions, media coverage, and ramifications of a housing bubble. From Mortgage Professional America, “Americans are becoming increasingly concerned about the housing market with many expecting a price correction. The Modern Homebuyer Survey from ValueInsured reveals that 58% are expecting a housing bubble and price correction within the next two years, a rise of 12 percentgage points since April. Those in Washington (71%), New York (68%), Florida (63%), California (59%) and Texas (58%) are the most concerned.”

“Unsurprisingly given these figures, 83% of owners think that now is a good time to sell while 63% of potential homebuyers are concerned that they might be buying high if they do so now. This rises to 72% among millennial buyers. More than half of homeowners nationwide believe that homes in their area are overvalued and consider prices unsustainable, rising to 65% among urban homeowners.”

From ABC 4 Utah. “It’s official–homes on the Wasatch Front cost more than ever before. The Salt Lake Board of Realtors sent out numbers this week that show staggering growth and a staggering home shortage. Troy Peterson is the President of the Salt Lake Board of Realtors. He says, ‘I’ve been selling real estate for 22 years and I’ve never seen anything like this. What’s driving the numbers is there’s no inventory.’”

“Some are worried about a ‘bubble effect’ like we saw in 2007 and 2008, but realtors are confident that we have a few more years of stability. They say without enough inventory, a bursting bubble is nearly impossible.”

From WUNC in North Carolina. “The Cotton Mill is emblematic of the entire Raleigh housing market, says Ann-Cabell Baum, who works with Wood at the Glenwood Agency, a real estate agency. Houses are on market for hours, not weeks. In rare cases, buyers make unsolicited offers on houses not yet on the market. ‘To describe the Raleigh housing market right now, 2017, would be, ‘Oh my goodness!’ Baum said. ‘We have seen some accelerated home prices.’”

“With all signs pointing toward dollar signs, it’s only natural for people to remember the last time the housing market went gangbusters. Even if the Raleigh housing market is more than a bubble, agents say they still deal with another hurdle: that of high expectations. Homeowners in the $600,000 market and above market see big increases and begin to dream about early retirement.”

From CNBC titled, ‘Luxury home prices soar as sellers come back down to earth’. “The slump in the swankiest sector of the housing market appears to be over, and, ironically, it may be due to a dose of reality among sellers. While some point to the recent runup in the stock market, the real reason for the luxury recovery may be a shift in the mind of sellers. They were asking too much, and now that they’re asking less, there is more action in the market, in turn boosting prices again.”

“Jonathan Miller, CEO of Miller Samuel, a real estate appraisal and consulting firm, points to a recent $15 million sale of a Brooklyn, New York, home. While the closing price was high, it sold at a 40 percent discount to its original list price, and the home took seven years to sell. The sales surge has caused a decline in the supply of luxury homes. ‘The housing shortage is now affecting the top of the housing market,’ said Redfin’s chief economist, Nela Richardson. ‘Yet despite the strong uptick in prices, the luxury market is not nearly as competitive as the rest of the market. Only 1 in 50 luxury homes sold above list price in the second quarter, compared to more than 1 in 4 homes in the bottom 95 percent.’”

“The same is true in Aspen, Colorado, where a surge in sales is overpowering supply. Single-family sales more than tripled in the second quarter of this year compared with a year ago, and condo sales nearly doubled. Sellers are meeting the reality of the market. ‘The buyers are in the driver’s seat,’ added Miller.”

From CBC News in Canada. “The cost of homes in Regina may be about to fall. Housing sales in Regina were down in the month of June. Meanwhile, listings were at a 10-year high. ‘That means there’s excess supply hanging around — not enough demand,’ said University of British Columbia business professor Thomas Davidoff. ‘Usually, that is a precursor to a decline in prices.’”

From the Telegram in Canada. “The Canada Mortgage and Housing Corp. recently released its third-quarter housing market assessment for St. John’s, and while there’s little change from the first half of the year, there are some small signs of strength. Chris Janes, senior market analyst in this province, says year-to-date housing starts in the St. John’s area are down 35 per cent from this time last year and the market as a whole is down 60 per cent from its peak in 2014. ‘That’s a big pull back, but if builders had continued to build, then we’d be in a massive oversupply situation as well and we’d see a lot more downside pressure on new home prices.’”

“Buyers are also much more patient and shopping around more than they were in the past, Janes says. ‘People have a lot of inventory to choose from, in a lot of cases high-quality homes, where they may have been looking for a bit of a fixer-upper and getting in at a lower price point and doing some renovations,’ he says. ‘The cycle from start to finish is longer between thinking about buying, intentions to buy and actually buying.’”

From ABC News in Australia. “Australia’s economy holds the world record for the longest recession-free run thanks, in large part, to a record home-building boom that offset the pain of the mining bust. But that boom is already past its peak and there is much worse to come, according to the latest Building in Australia forecast from BIS Oxford Economics. ‘As we move into 2018, particularly as those big high-rise apartment projects come off — commencements have been falling for nearly 12 months in Brisbane and they’ll start falling in Sydney and Melbourne — 12 months down the track, the level of work being undertaken will decline significantly,’ said the economic forecasting firm’s managing director, Robert Mellor.”

“BIS Oxford is forecasting the number of dwelling starts will decline from a peak above 230,000 to a trough around 160,000 within three years — a 31 per cent slump. The news is far worse in the high-rise apartment sector, which is predicted to face a 50 per cent collapse nationally, with falls in new building of up to 70 per cent in Brisbane and 60 per cent in Melbourne.”

“The steep declines are a direct result of the record construction boom, which has wiped out housing undersupply nationally, leaving only pockets of shortage in Sydney and Melbourne. ‘The underlying level of demand for dwellings, based on population growth [and] the level of household formation, is probably about 184,000 dwellings per annum,’ he observed. ‘So we’re basically overbuilding in a long-term sense.’”

“That means that Australia also faces a serious oversupply of construction workers, with the mining boom gone and the residential building boom set to fade fast. Mr Mellor said tens of thousands could find themselves unemployed. ‘If you’re seeing a decline in the order of the peak of 230,000-plus dwellings to a trough somewhere between 160-170,000 dwelling commencements that’s a pretty significant decline in the required level of employment,’ he warned.”

“He said the downside risk to BIS Oxford’s forecast is the danger of a downward spiral that this decline in employment could trigger through increased mortgage defaults, falling home prices and further cuts to development plans. Another risk is the reliance on investors to underwrite the current apartment boom. ‘Overseas investors are now facing significantly higher taxes as well as maybe there’s still restrictions upon funds being able to come into the country from overseas, or overseas investors being able to get local funds,’ he said. ‘Coupled with that, you’ve got local investors finding it harder and paying significantly higher interest rates, particularly for interest-only loans.’”

‘I’ve been selling real estate for 22 years and I’ve never seen anything like this. What’s driving the numbers is there’s no inventory.’

‘Some are worried about a ‘bubble effect’ like we saw in 2007 and 2008, but realtors are confident that we have a few more years of stability. They say without enough inventory, a bursting bubble is nearly impossible.’

“Some are worried about a ‘bubble effect’ like we saw in 2007 and 2008, but realtors are confident that we have a few more years of stability. They say without enough inventory, a bursting bubble is nearly impossible.”

With the common knowledge shared by so many investors that buying and holding real estate is the easy path to riches, fueled by yield suppression in perpetuity from the Fed, the inventory shortage is no mystery.

The interesting question regards what will happen when recent parabolic price gains die a death of exhaustion. Aren’t investors likely to dump at that point, flooding the market with inventory?

Savvy investors have not purchased new in a few years, keeping powder dry for the next crash. Mom and pop shops who levered up to participate in “early retirement” gambling will get sheered. The question is, will those requiring housing attempt to jump in after the next crash or will multiple generations decide homeownership is not the panacea realtards describe.

‘Homeowners in the $600,000 market and above market see big increases and begin to dream about early retirement’

Sure that’s how the world works. You buy a house, live in it a few years - retire. So somebody else has to buy it from you and pay for that early retirement, with interest. I’m supposed to pay my way, save for my retirement, and fund yours with a profit slipped in for the lender.

New Orleans Sewerage and Water Board director Cedric Grant blamed widespread flooding over the weekend on “climate change,” but it wasn’t long before news broke that broken water pumps were actually to blame.

Throughout the week, media reports have shown that New Orleans’s antiquated water pumping system failed to keep flooding at bay, and the problem hasn’t been resolved.

The mayor’s office warned Thursday morning a fire had taken out a turbine that powers most water pumping stations in the East Bank of New Orleans.

With more heavy rain forecast for this week, Mayor Mitch Landrieu is asking residents to prepare for flooding.

Its the dog ate my homework excuse, its what lazy and/or stupid people rely on all. the. time. Virtually every major city is run by those types of people who are essentially congenital liars and criminals. Its fascinating to watch because smaller towns *tended* to not have this, but as you see them grow you see the leadership become more criminal.

Todays world is like a twilight zone episode - we all talk about the fraud, deceit and utter stupidity openly and yet it continues on, like a bad record that skips.

And this is after the taxpayer spent 10+ billion on rebuilding and improvements. Problem is, once the building was done, the upkeep and maintenance was handed over to the local NO government. I’m surprised that *any* pumps were operating.

I’m sure NOLA is a tough place to put in a 24/7 utilities career with real work that has to be done juxtaposed with (equality, gender, racial, etc.) appointments who lack the skills and dedication necessary for a successful outcome.

The fact is, New Orleans should have NEVER been built there in the first place. How old are those massive pumps that keep the water out? Over one hundred years old now. Government has been bailing out New Orleans ever since then!

Earlier this month, Morgan Stanley warned that commercial real estate prices in New York City, Sydney and London would likely take a hit over the next two years as Chinese investors pull out of foreign property markets.

The pullback, they said, would be driven by China’s latest crackdown on capital outflows and corporate leverage, which they argued would lead to an 84% drop in overseas property investment by Chinese corporations during 2017, and another 18% in 2018.

Sure enough, official data released by China’s Ministry of Commerce have proven the first part of Morgan Stanley’s thesis correct. Data showed that outbound investment in real estate was particularly hard hit during the first half of the year, plunging 82%.

The pullback will likely be equally as devastating for residential home prices. Average sales prices for Manhattan residential real estate has continued to climb, but cracks are starting to appear. As we pointed out two days ago, 25% of homes sold in 2Q still experienced a price cut, with that number rising to 40-60% in trendy neighborhoods like the Upper East Side.

‘outbound investment in real estate was particularly hard hit during the first half of the year, plunging 82%’

I’ve been posting this all along. What happened? On December 31st of 2016, the Chinese government announced a serious crackdown on outflows. The effective date: January 1st, 2017.

February 8, 2017

From Bisnow on New York. “New York City is still the No. 1 destination for foreign capital in the world, according to this year’s AFIRE rankings, but it is no longer an environment in which foreign money — particularly from China — will buy anything in the market at any price. This year, China has clamped down on outbound foreign investment, and firms caught flouting the new laws will be punished harshly, China First Capital CEO Peter Fuhrman said. While most New Yorkers in commercial real estate are aware of the capital slowdown, Fuhrman said they are probably not taking it seriously enough.”

“‘I have the perception that the full weight and severity of these capital controls hadn’t been fully felt here,’ Fuhrman said. ‘It’d be fair to say that the Chinese central government dropped a financial bomb on its businesses.’”

“One of the Chinese government’s chief concerns when instituting the investment restrictions, Fuhrman said, is over outbound investors getting fleeced while paying record-breaking prices. ‘A concern of Chinese regulators is their investors have been really bad buyers,’ Fuhrman said. ‘This can sadly be seen more and more in the larger real estate deals they have done. What they are extremely concerned about is just about every acquisition the Chinese have made, is they have overpaid severely and foolishly, and that has spurred a loss of a lot of Chinese sovereign wealth.’”

‘The statistics explain why the once robust flow of foreign investors purchasing luxury condos and single family homes has slowed to a trickle.’

‘Miami Dade’s luxury condo inventory, defined as $1 million and up, skyrocketed 69 percent from the fourth quarter of 2015 to the fourth quarter 2016, according to EWM. At the same time, $1 million-plus condos only accounted for 4.5 percent of total condo sales in Miami-Dade during the fourth quarter of last year. In Broward, luxury inventory rose 34 percent. At the end of 2016, condo prices dropped 21 percent, year-over-year. Miami-Dade is facing a 47-month supply, and when it comes to condos priced between $2 million and $4.9 million, Miami-Dade has a 58-month supply of inventory and Broward County has a 76-month supply.’

‘At $5 million and above, Miami-Dade has a 108-month (or nine-year) supply of condos and Broward has an eye-popping 19 years, or 228 months, worth of supply. EWM Realty International CEO Ron Shuffield said the inventory glut and the slower sales pace is putting pressure on sellers to slash their asking prices. ‘Many of our sellers are coming to that realization,’ he said. ‘We’ve had a lot of success [telling] many of our sellers that they need to reduce prices.’

‘Santa Clara County’s commercial real estate market suffered a slump in 2016 compared to the white-hot year of 2015, but the sector should bounce back this year, according to a new forecast. ‘After the biggest year on record in 2015 for office activity, we sort of had nowhere to go but down,’ said Jeff Fredericks, executive managing director of the San Jose office of Colliers International, a commercial realty brokerage that issued the new report. ‘We predicted that office activity would come down to earth, and so it did.’

‘The report did point to a troubling trend of rising sublease space that is appearing as tenants vacate offices that they had already rented. At the end of 2016, Santa Clara County had 2.6 million square feet of office space available for sublease — double the 1.3 million square feet that were available at the outset of 2016, Colliers reported. Sublease space represented 29.8 percent of the office space available at the end of 2016, a huge jump from the 19 percent figure at the beginning of 2016.’

‘In a sign of a possible bubble for commercial real estate — and overbuilding — about 5.7 million square feet of Santa Clara County office buildings that are completed shells or are under construction are not leased and have no commitments from occupants. A year ago, that uncommitted figure was 1.7 million square feet.’

They are still building like mad-men in Santa Clara County and approving more…The newest question for a mega development in San Jose is if Google will leave there Campus in Mt. View and relocate to the 5-mil square feet in Downtown S.J. located next to the train station, light rail, VTA and ultimately BART…You would think a company thats spent many Billions building and acquiring real estate would not consider that but parking, housing & traffic are a nightmare in Mt. View…Relocating to San Jose allows easy access to public Transportation that allows people to get out of their car and readily access much more affordable housing and leaving the Mt View Campus may just be a rounding error for Google as far as cost go…

Currently foreclosing on a house in Sacramento (I’m the first lien to a buy & rent borrower who’s paying me 10% interest). I’m also the 2nd lien on a series of townhomes in Houston that are currently being foreclosed by a slightly larger PE firm. Builder finished the homes but hasn’t been able to sell and now can’t pay other bills and is filling bk.

Both projects are only 60-65% LTV and I’m going to make more money than if they’d just paid off the land.

A year ago most of my borrowers paid off early by selling it securing standard takeout financing after building. Never had the pleasure of foreclosure until this yr. I pay local forms to handle bc I am out of state and don’t want my law license involved mucking it out with their courts.

I haven’t made any new loans since March, I believe a storm is coming to buy-rent and flippers.

Also haven’t bought any rentals for myself in over a yr. All spring it was cash sales to corporate entities. Even in low rent, semi shady areas (Dundalk and middle River). These are areas with significant opioid issues and poor schools. Screw competing with all cash in those areas.

Holding a lot of Bitcoin, eth, and ltc and pulling cash. I love Trump but the markets have not been reinforced, they were weakened by too much lending and softening demand from boomers is real.

Yes it’s part of what I invest in. I am into other alternative investment as well.

Middle River is Eastern Baltimore county, kind of downscale like Rosedale, Essex, white Marsh, Dundalk, Edgewood. It has a lot of older housing stick that is very solid but ugly. Perfect for rentals but you have to do at least the basic work yourself and be in the game for the long haul. The prices are basically never really going to rise because anyone doing well enough will trade up to a better area. Which is why I’m shocked that corporate money wants to be in these areas.

4) Here’s a new building that wants $4,150/mo for a 2 bedroom apartment! What’s that the equivalent of, a $700K mortgage? You get a view of busy Olympic Blvd and are walking distance from a 7/11 and a Subway!:

5) There are an astonishing number of new units available about 8-10 miles south in an area roughly known as the Howards Hughes center. You can have a beautiful view of the congested and awful 405. (This is the highway that’s so bad that it inspired Elon Musk’s new tunnel drilling company.) There is nothing nice around. No parks, no nothing. But there’s a movie theater with a patronage mix of barely middle class and ghetto, a Dave ‘n’ Busters, and Buffalo Wild Wings!:

More than anything, I wanted to give you a local sense of what you’ve been covering for a long time. Tons of luxury units coming to market. Are any of these people going to get the rents they were planning to get?

‘Four glossy glass towers are rising at Metropolis, the six-acre mega-project just north of L.A. Live.’

‘The first move-ins will begin this month, according to the developer, the U.S. subsidiary of the Shanghai-based company Greenland, and by the end of the year the full first phase of the $1 billion development will be open, delivering a 38-story condominium tower with 308 homes and an 18-story Hotel Indigo. Ultimately the project will create more than 1,500 for-sale units.’

‘Representatives of Metropolis have for months touted strong sales of the condominiums, saying that the first tower is already 70% sold.’

‘A question is brewing: What effect will that actually have on the streets of South Park and on the evolution of the neighborhood? Early concern focuses on the likelihood that residences are being purchased by people from other countries, particularly China, who won’t live in Metropolis full-time.’

‘The worry extends to the overall South Park condo explosion — nearly everyone in Downtown cheers the 3,500 for-sale units that are under construction or in the pipeline, but real estate experts fret that the community benefits could be muted if there is a preponderance of “absentee” owners who are snapping up luxury units. Residences in the first phase of Metropolis range from $600,000 for studios to more than $2 million.’

‘Local condo brokers, however, say they have not seen a swell of buyers from Los Angeles, and that sales instead are trending international, largely Chinese, with high down payments common. Greenland has a dedicated China sales center for Metropolis, according to area brokers and the project’s main website.’

“They have a whole pool of units that aren’t available to U.S. buyers,” said one realtor, who asked not to be named to avoid impacting business relationships.’

‘Then there are the global aspects, as the slowing economy in China has helped to inspire a sizzle of outbound investment. Los Angeles, New York City and London are among the cities that have seen an infusion of Chinese money.’

‘For sellers, one advantage of Chinese buyers is their habit for simple transactions: 71% of them pay in cash, according to a 2016 survey from the National Association of Realtors. That echoes the way purchases are often made in China.’

‘Foreign buyers of all description also tend to pay more for homes than U.S. purchasers. Chinese buyers, the survey said, take more U.S. units and spend more money than people from any other foreign country.’

‘Absentee ownership in a building is particularly unattractive to lenders, added realtor Allyson Connolly. She said certain lenders could halt loans if a building exceeds a specific percentage of non-owner-occupied homes.’

“The main reason is that, if there’s a financial downturn and you have an owner with multiple properties, which ones are they going to stop paying the loan on?” she asked. “Not the one they’re living in.”

But what I’ve been trying to point out is the story you’ve done so well to ducoment. In West LA alone, (worlds away from downtown in many ways), within a 3-5 mile radius, there are upwards of 20 buildings or more going up. All have 30-70 units and they’re all luxury. I can’t help but wonder where their tenants going to come from at the rents they want.

They won’t fill these apartments at these prices. Here’s the real incredible part: even if they did, it wouldn’t return squat. Maybe 3% or 5% if everything went like clockwork, which never happens. So why build them? To sell. Because the prices will go up, way up. That motivation is the key, and it has worked for years because of yield chasing and super easy money. Like most manias, there is a kernel of truth to the “story”, at least at first. Then the logic gets thinner and thinner.

‘8% returns sound great!’ Then, ‘5% isn’t so bad, we’ll still make money selling it.’ ‘Land has skyrocketed, only luxury will pencil out!’ ‘We aren’t overbuilding, we could do this for 20 years and not overbuild.’

This goes on long enough and you get oversupplied with stuff almost no one can afford. Quite the pickle.

A couple of years ago I mentioned that old commercial was getting a face lift into luxury apartments in downtown Seneca Falls NY. They never rented. Now the entire building block is for sale. First we are behind the curve, then we are ahead of it.